Sleeping with the enemy: the hidden risks of M&As

The pharma and biotech sectors are awash with activity. Large and mid-sized firms are forecast for a strong and sustained uptick in deal activity, with 2017 already being hailed as a record year for pharma M&A by industry commentators like EY.

But it’s no secret that the difference between a successful M&A and a failed one is often intangible, with a string of notable horror stories overshadowing the history of such transactions. The innumerable logistical, cultural and strategic challenges involved in making an integration work don’t paint the whole picture. Alongside all the mainstream risks we know and work hard to mitigate, there’s another category of risk that deals bring with them, and one that is easily overlooked: the internal risk of unknown, unchecked employees with access to data, IP and vital infrastructure.

New company, old habits

One challenge is leadership change. Senior management teams post-merger suddenly find themselves with a lot more decisions to make and a lot more fires to fight, as they attempt to amicably carve-up roles and responsibilities among different teams. It helps if leadership teams reflect the values of the new business, and understand the strategy and strengths of the combined business rather than as two separate companies.

The often uncomfortable truth is that partisan bias, or even the perception of such bias, can be highly damaging to the morale of both companies as they come together. So the best leadership for a newly evolved company may not always come from within. Just because the incumbent leadership was able to steer the company through the challenges it faced in the past, doesn’t necessarily mean that they’re the right people to carry on under different circumstances and in the face of new obstacles.

The management team in place during the early stages of integration will be responsible for setting the tone of the combined business and leading the charge for successful amalgamation. The success or failure of the whole operation is in their hands, not to mention the future prospects of the company and its reputation. It is therefore this group, more than any other that companies should pay close attention to, checking and regularly rechecking their background and credentials, especially when the role or the person in it changes.

Multiplying the risks

Another big challenge for companies during an integration process is keeping staff focused on the core business and day-to-day practices. Productivity is a victim of even the best managed mergers, so firms are fighting an uphill battle as it is. With so much upheaval, so much to distract the attention of the workforce and the justifiable fears around job security and the long-term future of an individual’s team, department or division, everything else needs to run smoothly.

Meanwhile, mergers can give rise to the need for a specialist and sometimes temporary additional teams. For example, a separate integration team to manage the business transformation throughout all areas during a merger can allow the rest of the company to get on with the job at hand.

In summary there are a broad array of workforce threats that merging companies must contend with. From a leadership that is faced with necessary changes to its makeup and skill set, through to a workforce made fickle by uncertainty and doubt, alongside the added complication of a shadow workforce full of new, unknown employees, there are plenty of concerns to furrow the brows of risk managers. But that’s not all.

Attrition and retention

M&As will often involve cuts, or employees who are demoted or pushed sideways into new roles. It can be a difficult and stressful period. But avoiding disgruntled employees is about more than just holding onto your best minds. It’s the issue of carefully and strategically filling the gaps left behind by those indispensable roles that are often the inevitable by-product of organisation-wide change.

Losing critical talent is a risk during a business integration because of the confusion large company changes can cause to employees. People with good skill sets who are motivated and valuable to your company are also marketable and valuable to other companies, and so is what they know. Some people won't wait around during an integration to see where they end up; they will go out and look elsewhere.

So on top of leadership needs, a boom in the temporary workforce and the ongoing challenge of sky-high employee turnover, there’s the smattering of key roles and positions which have already fallen vacant and need to be filled quickly to avoid value seepage.

The first rule of pressurised hiring: know whom you’re dealing with

The reality is that for several months after an acquisition, it can be very hard to know exactly who is in the newly formed company, what their interests and motives are, and whether they pose a legitimate threat to the current or future business.

A big issue with mergers and takeovers is the unknowns that come with each business. A priority for an acquiring company should always be due diligence into the employees of any target business. The nature of highly regulated sectors, like the pharmaceutical industry or financial services, means risks affect wider groups than just that immediate company.

Employee due diligence - a thorough check that they are who they say they are, have the skills they claim, and don’t have any particularly pertinent skeletons in the closet - is a step that is often missed out during a merger or takeover. When acquiring a business, it is important to remember that the new workforce is largely an unknown factor. How you go about mitigating risk in the case of a merger or acquisition can prove to be more complex than during the initial recruitment process.

The benefit of good planning means you know what risks you are facing and where and how to identify any other risks. It also means that you have a formal audit trail that shows you have taken appropriate measures to do due diligence around the business you're acquiring. Companies often forget about people when it comes to risk. The best way to manage this is when you’re in an M&A negotiation, by including due diligence on staff as a prerequisite.

Alternatively, a screening policy - a process that is common in the US and growing in practice elsewhere - can be put in place post-merger. The biggest mistake is simply ignoring due diligence on the workforce of a merging business.

With so many people coming and going and so many new skills required, from the very top right through to temporary transition teams, the opportunities for staff with unsavoury intentions to slip into a company unnoticed are at a level that will never be matched at any other point in the lifecycle of the business. It a time when distractions are rife and due diligence can be pushed down the priorities list, but ensuring that the right processes are in place before activity even kicks off can save companies from disaster.

Steve Girdler is managing director EMEA for candidate due diligence company HireRight www.hireright.com